Tuesday, October 28, 2008

Tim Wu takes a couple of shots at Greg Mankiw's work incentives under an Obama tax regime. Greg made the point that Obama's tax plans make it preferable for him to spend time with his family instead of putting out the extra effort to earn another dollar. Tim makes the following two arguments:

1. It assumes that his only incentive to do any work outside of his regular teaching and research is to make money. This seems so counter to what the idea of academia is for, and is passed over so easily.

Tenured academics like Greg M. have an incredible luxury: the time, freedom to work on what he wants, and a guaranteed paycheck (in his case, a large one). To say in that position you’ll only do “more work” if paid seems an offense to the idea of academia itself. Academics aren’t supposed to be on sale or work only on commission.

It appears to me that Tim is suggesting that tenured professors should not be paid for speaking engagements or consulting services. Since that can't be what he really means, I feel that Tim is being disingenuous. He is using the Professor's occupation to deny Mankiw the opportunity to freelance by implying that speaking and consulting are somehow part of his professorship. Neither Tim nor I know what the Professor's compensation includes, but I would not be surprised if it explicitly allowed and even encouraged Mankiw to pursue consulting and paid speaking engagements.

Greg M. himself is disproof of his own ideas. He spends alot of time blogging, and writing advice for junior professors and so on, all for free. If Obama wins, it looks like he’ll be doing more of that in the future. Obama, if his blog post is right, will alter the balance of commercial and non-commercial work he does. The irony is that that result might be better for society than Greg M. doing a bunch of consulting or paid-speaking.

The professor does not blog "for free." He blogs to receive the accolades of people like me, to improve his name recognition to advantage himself in future salary negotiations, and (perhaps most importantly) to sell his favorite text books. Similar, I blog in the hope of someday receiving a free, signed copy of the Professor's wisdom for defending him against economically illiterate attacks.

As to what is best for society, I do not think Tim is the one to judge. Surely a teenage neighbor of the Professor would benefit from a sitting job while Mankiw lectures out of town. Or perhaps one of his own children is old enough to be entrusted with the care of their siblings and the stimulation of the local economy. With a more favorable tax structure, the good Professor might hire a nanny or au pair to help raise the children, prepare meals, and clean the house. This would not only employ someone directly, but on that rare Friday night when the Professor has no speaking engagement, he and his wife could go out for a truly spectacular dinner at Aujourd'hui thus employing, in part, a few more people.

All of that is the work of the invisible hand.

Tim continues:

2. The implication, taken by other writers like “Beldar” though not by Greg himself, is that Greg working less is proof that Obama’s tax cut will hurt the country. But hold on - Greg represents 5% of the country. The rest — the 95% percent who get a tax cut, will presumably have reasons to want to work harder, because their taxes are going down.

Roughly 40% of wage earners pay no income tax. They do pay payroll taxes, but then a plan to return Social Security revenue is surely a plan to accelerate the collapse of that great ponzi scheme.

It’s a simple calculation. The tradeoff is those who make more than $250,000 doing less commercial and more non-commerical work, versus 95% percent of the population who have reasons to do more.

Its at least ambiguous. And since the money is worth more, on the margin, to people who make less than $250,000, they have more reason to want to work for it. $1000 means more to someone who makes $60,000 than to Greg M.

I agree with Tim; however, I think that the "Pigovian" income tax that I propose creates even greater incentive for lower wage earners to do additional work while also potentially increasing the Professor's incentives. It's not an either or.

The upshot: Obama’s tax plan will encourage a rich man like Greg M. to devote more time to the public and his children instead of paid speaking gigs, and gives a lot more other people more incentives to earn more money. Sounds pretty good to me.

I do not know if the Professor is rich since I only know that his income is in the upper middle class. Perhaps he is not particularly frugal, but would become so if allowed to work for and save more money. I'll agree that it "sounds pretty good" in one respect: Joe the Plumber can lowball Mankiw on a lot of those speaking gigs and probably do a reasonable job at the lectern.

20 comments:

Because Mr. Obama's tax credits are phased out as incomes rise, they impose a huge "marginal" tax rate increase on low-income workers. The marginal tax rate refers to the rate on the next dollar of income earned. As the nearby chart illustrates, the marginal rate for millions of low- and middle-income workers would spike as they earn more income.

Some families with an income of $40,000 could lose up to 40 cents in vanishing credits for every additional dollar earned from working overtime or taking a new job. As public policy, this is contradictory. The tax credits are sold in the name of "making work pay," but in practice they can be a disincentive to working harder, especially if you're a lower-income couple getting raises of $1,000 or $2,000 a year. One mystery -- among many -- of the McCain campaign is why it has allowed Mr. Obama's 95% illusion to go unanswered.

Don't forget that the good Professor's speaking engagements may stimulate a thought or idea in one of his listeners that provides further benefits to an individual, business or even a government. Not speaking denies that interchange of ideas and stifles creativity.

Tim Wu takes amazing, intrusive, and contradictory positions:(1) Greg likes to work, and he is well paid for that work, so we'll take his money because we expect him to continue working. (A type of situational slavery).

(2) As an ethical academic, Greg shouldn't care about the money. Academics already belong to society. I don't see the use that Greg has for more money.

(3) Greg already does work for free, showing that money doesn't mean much to him. So, we'll take it and give it to people to whom it means a lot (people who vote for us).

(4) Greg may work less. So what? There will be more work for others.

(5) Lowering taxes for the 95% will encourage them to work more.

About (5). The Obama tax plan doesn't lower taxes for the 95%, it just doesn't raise taxes for them. Most of the benefits are phased out at higher incomes. Today Sen. Biden used $150,000 as the level for cutting off benefits, and I beleive the phase-out would be at much lower levels.

Worse, middle class workers would face large marginal tax rates, certainly discouraging them from working more. A disaster.

"The upshot: Obama’s tax plan will encourage a rich man like Greg M. to devote more time to the public and his children instead of paid speaking gigs, and gives a lot more other people more incentives to earn more money. Sounds pretty good to me."

That's wonderful, Tim, if that's what YOU want to do or how you want to live your life. What if that's not what the professor wants to do ? This disincentive to work (which Wu conceded it is) is damn near un-American. That is why America has been the beacon for freedom loving people around the world. If you want to go to America (legally, different topic) and make the life you want, you can do it. You are allowed to pursue your dreams without the government interfering. What if your dream is to be wealthy? There is fairly well known document that contains the words "...life, liberty, and the pursit of happiness..". It is the underpinning of our republic along with the Constitution and these guys and there ilk have no true understanding of what freedom means. Listening to Barack Obama speak on the radio tapes from 2001 (Constitution only says what the government or state can't do to you, not what the government must do for you..), and then seeing the attitude of someone like Wu (who is probably educated beyond good sense) frightens the hell out of me. And they say GWB wanted to take away personal freedoms.

In a P-O-R era, I will build relationships, develop ideas, create and store up value in many ways, but declare the bare minimum of taxable income. I, and many like me, can be poor for as long as the redistributors roam free.

Prof. Mankiw's "analysis" is much too simplistic and should not be taken literally. I suspect he did not even intend for it to be taken literally.

First, most people like Prof. Mankiw will not take their marginal earnings and invest them directly in a business that they will form. Most of the time they will invest in stocks or mutual funds, or at least put the money in a savings account or perhaps tax exempt bonds. Consequently, in Prof. Mankiw's formula, the term r(1-t2)(1-t3) does not reflect anything close to what his future investment decisions are likely to be.

Second, currently the estate tax is computed on the balance over $2M, and this increases next year to $3.5M. This exemption would cover the estates of a lot of people (although certainly not everyone's). Thus for many small estates, which fall below the exemption amount, the estate tax is precisely zero, i.e., in Prof. Mankiw's formula, t4=0.

I realize that Harvard faculty earn very good salaries (better than most), but I suspect that t4=0 will be a more appropriate choice for Prof. Mankiw when he retires than either t4=0.45 (Obama's plan) or t4=0.15 (under McCain's plan). That is, most if not all of his estate is likely to escape taxation, and that's what his analysis probably should have assumed.

The main problem with any major change in tax laws is that it makes it very difficult for people to plan for the future, and this represents a real cost. In my lifetime, there have been several major changes to the tax laws. Each of them has, in effect, cost me a huge part of my savings. This penchant for Congress to keep pulling the rug out from under people is a great disincentive to save, regardless of the marginal tax rates. To plan for retirement, people need a stable tax code that doesn't change drastically every few years during their working lifetimes. Corporations can adapt and eventually usually recover from structural changes in the tax code. Families are at a huge disadvantage: we each have only about 4 decades to raise our children and save for retirement. We cannot start over again if misguided legislation reduces our hard earned savings to ashes.

Tim Wu is wrong on even more levels. His comment that the other 95% of workers will have the incentive to work more due to lower taxes is simply incorrect. The workers who pay no tax will continue to pay no tax, so the cut will not impact their marginal income. (Although they will receive a payment from other tax payers. But getting free money hardly seems like an incentive to work more.) Additionally, even if the 95% wanted to work more, the people who create the jobs (the 5% getting a tax hike) are less likely to hire them. At least they will have more time for "non-commercial" time with their families. You don't need an economics degree to understand the incentives (or lack of) in Obama's tax plan, but you do need to at least engage in some rational thought.

Not only does Obama's plan amount to a near total disincentive for most of us to either work or aspire to higher responsibilities and higher pay, he is virtually no different than Robert Mugabe in his plans to steal our private property (earnings, 401Ks, homes, automobiles, etc.), as well as our freedom of speech and association. About the only difference is he hasn't ordered the slaughter of anyone yet. He also never spoke out against Mugabe to my knowledge, but then precious few Democrats in Congress have.

I've also had it with academics (or Hollywood, or Congress, or basically anyone at all) telling us Joe the Plumbers how to live our lives and what of our earnings we may keep. One thing is for sure - if Dems have their way, the Carter years will look golden by comparison. Pity so few of today's voters remember the Carter years.